Fully proven model rolls out

DP Poland (LON:DPP) has proved that the Domino’s formula works as well in Poland as it does elsewhere in the world; its mature stores are substantially profitable. With 60 stores now open in Poland but only seven mature corporately owned stores, the strength of the operation does not show up in the group profit figures. The remarkable thing about the Domino’s franchise is the seemingly endless growth in same-store sales. DPP has laid the foundations of a very substantial business but, so far, there is little showing above the surface. We believe it will – in time.

Strategy: DPP has spent the first few years of its existence proving the Domino’s Pizza model in Poland and honing its operations. With the new commissary up and running, it has scope to double the number of operations over the next few years. As the stores mature, the success should show up in reported profits.

Competitive market: DPP has neither the pizza market nor the food delivery market to itself in Poland. Both are established, but current evidence shows that the Domino’s formula of focusing on high-quality pizza, delivered swiftly, is as hard to beat in Poland as it is in the rest of the world.

Valuation: We are not expecting reported profits for the next few years, so we have looked at valuing DPP on a per-store basis. We value stores of different maturity separately and also look at the value of future stores. We derive a central value of around £80m, or 52p per share.

Risks: In the short term, DPP faces cost pressures, especially on labour, but so do its competitors. Finding franchisees and finance for them is a hurdle. Longer term, we see general competitive behaviour as the biggest threat to our forecasts. There is also some country political risk.

Investment summary: The story for DP Poland is quite simple: it has a powerful retail consumer franchise in a fast-developing economy. The share price has reflected the ups and downs of any startup business that would typically be sheltered from public scrutiny. DPP seems to have it all running smoothly now, and we believe the profits will follow as the existing stores mature.

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